Free Banking

[Vanguard101]

This might be a dumb thread but I just realized I really don't understand fully how banks would differ from the Fed in a free banking system. Wouldn't they still set interest rates? Wouldn't they still be able to lower the interest rates? Also, what banks wouldn't use fractional reserve banking? How would the be able to loan the same way they are able to do now?

[kcchiefs6465]

This might be a dumb thread but I just realized I really don't understand fully how banks would differ from the Fed in a free banking system. Wouldn't they still set interest rates? Wouldn't they still be able to lower the interest rates? Also, what banks wouldn't use fractional reserve banking? How would the be able to loan the same way they are able to do now?

There are two separate options. They can be a full reserve bank and charge a given fee for the service. What that means is that they retain every dollar you put in for a nominal fee to hire the staff or guards needed to ensure a properly functioning and safe store of wealth. The market would produce competition which would result in the lowest price possible. As well, some people may opt out and not use banks whatsoever.

The second option would be a contract given where one places their money into the bank's possession with a contractual clause that the money cannot be withdrawn for a given period of time. They would collect interest on the bank's use of their capital. Again, the market would dictate the rates of return.

If we had a currency backed by gold, the relative demand of gold or rather the availability of capital would dictate the interest rates. More people living comfortably with their earnings, depositing more of their wealth to be loaned out would favor lower interest rates. People being strapped for money, not able to risk what they have for the return that could be had would encourage higher interest rates.

The interest rate would fluctuate with the availability of money. They could raise the interest rate to whatever they wanted to. No one would take their loans. They could lower the interest rate and loan out more money than is economically intelligent and go bankrupt. Perhaps one day we can live in a society where such is the case (rather than bailouts and fascist business dealings).

Fractional reserve banking is fraud. It should not be tolerated by society. They are loaning money they do not have and collecting interest on it. If there ever comes a bank run, they figure they'll just debase the currency, print dollars as they need. That only goes so far and has a negative impact on not only the economy but the individual person.

They would not be able to loan the same way they do now. They take the most risky loans because they are covered by the FDIC with the backing of the federal government knowing ultimately that no matter what foolish ways they squander wealth on, they'll be rescued and their errors socialized (the lender of last resort, the Federal Reserve will save them). It should not happen. A free market, and I probably should define this as the term has been bastardized for so long that misconceptions arise, would not tolerate the moral hazard created by this funny money, debt based scam.

It will all come crumbling down.

[kcchiefs6465]

[Vanguard101]

There are two separate options. They can be a full reserve bank and charge a given fee for the service. What that means is that they retain every dollar you put in for a nominal fee to hire the staff or guards needed to ensure a properly functioning and safe store of wealth. The market would produce competition which would result in the lowest price possible. As well, some people may opt out and not use banks whatsoever.

The second option would be a contract given where one places their money into the bank's possession with a contractual clause that the money cannot be withdrawn for a given period of time. They would collect interest on the bank's use of their capital. Again, the market would dictate the rates of return.

If we had a currency backed by gold, the relative demand of gold or rather the availability of capital would dictate the interest rates. More people living comfortably with their earnings, depositing more of their wealth to be loaned out would favor lower interest rates. People being strapped for money, not able to risk what they have for the return that could be had would encourage higher interest rates.

The interest rate would fluctuate with the availability of money. They could raise the interest rate to whatever they wanted to. No one would take their loans. They could lower the interest rate and loan out more money than is economically intelligent and go bankrupt. Perhaps one day we can live in a society where such is the case (rather than bailouts and fascist business dealings).

Fractional reserve banking is fraud. It should not be tolerated by society. They are loaning money they do not have and collecting interest on it. If there ever comes a bank run, they figure they'll just debase the currency, print dollars as they need. That only goes so far and has a negative impact on not only the economy but the individual person.

They would not be able to loan the same way they do now. They take the most risky loans because they are covered by the FDIC with the backing of the federal government knowing ultimately that no matter what foolish ways they squander wealth on, they'll be rescued and their errors socialized (the lender of last resort, the Federal Reserve will save them). It should not happen. A free market, and I probably should define this as the term has been bastardized for so long that misconceptions arise, would not tolerate the moral hazard created by this funny money, debt based scam.

It will all come crumbling down.

Are you saying FRB is fraudulent because of the printing of money?

[brandon]

Honestly I don't think it would change commercial banking much at all. The only difference would probably be slightly higher fees to the customer.

[Guitarzan]

Are you saying FRB is fraudulent because of the printing of money?

he's saying it's fraudulent because it's a conflict of rights.

The bank lends out all of its deposits, while at the same time guarantees immediate withdrawal of the deposits upon demand from the deposit makers.


Therefore, they're guaranteeing something that isn't there.

[brandon]

They aren't guaranteeing anything. The guarantee on deposit accounts comes from the FDIC.

[Occam's Banana]

This might be a dumb thread but I just realized I really don't understand fully how banks would differ from the Fed in a free banking system. Wouldn't they still set interest rates? Wouldn't they still be able to lower the interest rates?

Interest is just the "price of (borrowing) money" - so in a truly free banking system, interest rates would be set by market forces (just like any other prices) and NOT by some particular institution (such as a central bank). IOW: In a free market, interest rates would be "set" the same way that, say, the prices of clothes or loaves of bread would be "set."

A particular bank would be able to lower the particular interest rate it pays out for deposits - or increase the interest rate it charges on loans - but it would have to do so in competition with other banks (and the interest rates that they set on their deposits and loans). Such market forces would achieve a dynamic equilibrium and the market will clear - with the result being what could be called "the" interest rate at any particular point in time ...

Also, what banks wouldn't use fractional reserve banking?

Full reserve banks would NOT use "fractional" reserves. Hence, the term "full reserve" banking ...
Full reserve banks would make their profits on fees for secure storage, transaction services, etc.

How would the be able to loan the same way they are able to do now?

Full reserve banks would not make loans the way they are typically made now (i.e., "fractionally" backed by deposits) - though they might make other "fully" backed loans (for example, they might loan out depositors' funds with their depositors' contractual agreement that not all deposited funds would be expected to be available "on demand" at any given time).

Fractional reserve banks would make such "fractional" loans - and they'd do it pretty much the same way they do it now.

Are you saying FRB is fraudulent because of the printing of money?

Fractional reserve banking involves loaning out money up to a fraction of (total) deposits - while also allowing the loaned-out "fraction" of those deposits to remain available to depositors. That loaned-out money may then be deposited (at the same bank or another one), which then in turn may be loaned out up to a fraction of the deposit - while also remaining available to the depositor. That loaned-out money may then be deposited ... and so forth likewise.

So under fractional reserve banking, a continuously decreasing fraction of original deposit amounts is repeatedly being created "out of nowhere" as it were (with the "created" money being "destroyed" or going "back to nowhere" as "fractionally"-backed loans are eventually paid off). This is technically not quite the same thing we mean when we talk about central banks "printing money" (which literally does involve the ex nihilo "creation" of new deposit funds) - but it ultimately has the same inflationary effect.

Some (most?) Austro-libertarians believe that fractional reserve banking is inherently fraudulent, due to its inflationary aspect - and some do not. As I understand it, Austro-libertarian defenders of (private, free market) fractional reserve banking argue that the monetary inflation inherent in fractional reserve banking is a limitable phenomenon that can and would be effectively managed and "kept in check" by market forces (which would punish banks that lend out too great - or too small - a fraction of deposits, in much the same way that it would punish banks that set their interest rates too high or too low).

As far as I know, all Austro-libertarians agree that full reserve banking is fine and not problematic.

[kcchiefs6465]

They aren't guaranteeing anything. The guarantee on deposit accounts comes from the FDIC.

And how much does that cover? And who ultimately covers that?

And what is usury?

[brandon]

And how much does that cover? And who ultimately covers that?

And what is usury?

It covers $250,000 per depositor, per insured bank.


I'd recommend checking out dictionary.com or the wikipedia article to find out what usury is.

[Danke]

Honestly I don't think it would change commercial banking much at all. The only difference would probably be slightly higher fees to the customer.

Instead of inflation past along to non customers.

[TaftFan]

Fractional reserve banking is not fraud. I know exactly how it works and I am not being mislead.

[kcchiefs6465]

It covers $250,000 per depositor, per insured bank.

I'd recommend checking out dictionary.com or the wikipedia article to find out what usury is.

Right. And if the people have two million dollars in the bank?

This even ignoring the fact that the FDIC isn't some grand wealth creating entity. The people would pay for the bailout, not the FDIC. The cost would be socialized, not covered individually and in whole. Aside from this are the legal tender laws forcing everyone to accept pieces of depreciating paper for any debt.

I would say collecting any interest on fictitious money would be usury. I would say loaning out money you do not have is fraud. And I would say the socialists ought wise up about their foolish ways as well as reject their immoral and authoritarian inclinations.

[Zippyjuan]

There are two separate options. They can be a full reserve bank and charge a given fee for the service. What that means is that they retain every dollar you put in for a nominal fee to hire the staff or guards needed to ensure a properly functioning and safe store of wealth. The market would produce competition which would result in the lowest price possible. As well, some people may opt out and not use banks whatsoever.

The second option would be a contract given where one places their money into the bank's possession with a contractual clause that the money cannot be withdrawn for a given period of time. They would collect interest on the bank's use of their capital. Again, the market would dictate the rates of return.

If we had a currency backed by gold, the relative demand of gold or rather the availability of capital would dictate the interest rates. More people living comfortably with their earnings, depositing more of their wealth to be loaned out would favor lower interest rates. People being strapped for money, not able to risk what they have for the return that could be had would encourage higher interest rates.

The interest rate would fluctuate with the availability of money. They could raise the interest rate to whatever they wanted to. No one would take their loans. They could lower the interest rate and loan out more money than is economically intelligent and go bankrupt. Perhaps one day we can live in a society where such is the case (rather than bailouts and fascist business dealings).

Fractional reserve banking is fraud. It should not be tolerated by society. They are loaning money they do not have and collecting interest on it. If there ever comes a bank run, they figure they'll just debase the currency, print dollars as they need. That only goes so far and has a negative impact on not only the economy but the individual person.

They would not be able to loan the same way they do now. They take the most risky loans because they are covered by the FDIC with the backing of the federal government knowing ultimately that no matter what foolish ways they squander wealth on, they'll be rescued and their errors socialized (the lender of last resort, the Federal Reserve will save them). It should not happen. A free market, and I probably should define this as the term has been bastardized for so long that misconceptions arise, would not tolerate the moral hazard created by this funny money, debt based scam.

It will all come crumbling down.

Fractional Reserve Banking means that a bank must keep a portion of deposits on hand to meet withdrawl requirements. A non- fractional reserve bank has two possiblities. One- a Full Reserve bank which you describe. A bank is not allowed to make any loans from deposits (100% must be kept in "reserve") so charging fees to store your money for you (or for other services) is the only way they can make money. No lending would occur (unless you can borrow from family members or friends). Business could not borrow to expand their production. Individuals could not borrow to make large purchases (like a house or car or school). Cash only. Slower economic growth.

Second option- a "no reserve" banking system. Banks could loan out up to 100% of deposits if they want- they don't have to keep any reserves (they would likely choose to not do so since that would increase the risk of a run on the bank should they be unable to come up with cash for any withdrawls of accounts). In this case, it would actually not be different from what we have today since they would still keep some deposits in "reserve". The amount of the reserve would be up to them but they would still be acting as a fractional reserve bank so in practice, nothing would be different from fractional reserve banking we see today.

Fractional reserve banking is fraud. It should not be tolerated by society. They are loaning money they do not have and collecting interest on it. If there ever comes a bank run, they figure they'll just debase the currency, print dollars as they need. That only goes so far and has a negative impact on not only the economy but the individual person.

Banks can't "print the dollars they need". The Federal Reserve does that. Unless you got rid of the Federal Reserve and Treasury and let banks make their own currency (like in the Free Banking Era which eventually collapsed. And a bank can't "loan money they don't have". Loans are allowed to be made up to a certain percent of money (deposits) they do have- usually up to 90% of such funds. If they don't have enough deposits, they are not allowed to make the loans and that must be balanced daily.

They would not be able to loan the same way they do now. They take the most risky loans because they are covered by the FDIC with the backing of the federal government knowing ultimately that no matter what foolish ways they squander wealth on, they'll be rescued and their errors socialized (the lender of last resort, the Federal Reserve will save them). It should not happen. A free market, and I probably should define this as the term has been bastardized for so long that misconceptions arise, would not tolerate the moral hazard created by this funny money, debt based scam.

It is true that they would lose any loan guarantees which would mean lenders would have to be more careful on who they lend to or risk going out of business. Depositors would also lose any insurance on deposits (unless a bank took out its own insurance policy on them) so they take on higher risk as well of losing their money if their bank goes bust. The FDIC only insures deposits (up to $250,000) not loans though. Fannie Mae does insure home loans.

If we had a currency backed by gold, the relative demand of gold or rather the availability of capital would dictate the interest rates. More people living comfortably with their earnings, depositing more of their wealth to be loaned out would favor lower interest rates. People being strapped for money, not able to risk what they have for the return that could be had would encourage higher interest rates.

Backing a currency with gold (or anything else) will have no impact on interest rates. The supply of money and demand for loans would determine that.

How would you propose banks should operate?

[Zippyjuan]

And how much does that cover? And who ultimately covers that?

And what is usury?

Usury is EXCESSIVE interest but what does that mean if a lender and a borrower agree on the terms of a loan including the rate charged?

http://www.investopedia.com/terms/u/usury.asp

Definition of 'Usury'

The act of lending money at an interest rate that is considered unreasonably high or that is higher than the rate permitted by law. Usury first became common in England under King Henry VIII, and originally pertained to charging any amount of interest on loaned funds. Over time it evolved to only mean charging excess interest, but in some religions and parts of the world charging any interest is considered illegal.

[kcchiefs6465]

Usury is EXCESSIVE interest but what does that mean if a lender and a borrower agree on the terms of a loan including the rate charged?

I would argue that any interest on invented/fictitious money is usurious.

The people agreeing to the loan are one, those committing fraud (though ultimately I recognize that many on the bottom of said scheme do not recognize as much) and two the overwhelmingly often ignorant. You are forced to transact in dollars. You are forced, largely, to go to the banks for a loan. The bank knows that no matter how foolish their investments are, they have something to fall back on. They are collecting interest on invented money. It is a castle built on sand and when the people realize as much, or when their pittances monthly do not buy them the food to sustain themselves and their relative comfortableness, they will revolt. And where will the FDIC be then, when there is a catastrophic run? Debasing the currency to pay people back in printed notes/illusory wealth.

It is the cause of many of today's ills.

It is immoral. It is fraud. And it shouldn't be tolerated.

[axiomata]

I would argue that any interest on invented/fictitious money is usurious.

That doesn't make a whole lot of sense. What about interest below the inflation rate? Is that usury?

[kcchiefs6465]

Fractional Reserve Banking means that a bank must keep a portion of deposits on hand to meet withdrawl requirements. A non- fractional reserve bank has two possiblities. One- a Full Reserve bank which you describe. A bank is not allowed to make any loans from deposits (100% must be kept in "reserve") so charging fees to store your money for you (or for other services) is the only way they can make money. No lending would occur (unless you can borrow from family members or friends). Business could not borrow to expand their production. Individuals could not borrow to make large purchases (like a house or car or school). Cash only. Slower economic growth.

No lending would occur from a bank that was contractually obligated to maintain every dollar for those who simply wanted to save their money for another day (a full reserve bank). That is quite different from no lending would occur. The economic growth would be sustainable growth. It would largely limit the moral hazard and the malinvestment.

Second option- a "no reserve" banking system. Banks could loan out up to 100% of deposits if they want- they don't have to keep any reserves (they would likely choose to not do so since that would increase the risk of a run on the bank should they be unable to come up with cash for any withdrawls of accounts). In this case, it would actually not be different from what we have today since they would still keep some deposits in "reserve". The amount of the reserve would be up to them but they would still be acting as a fractional reserve bank so in practice, nothing would be different from fractional reserve banking we see today.

The second option, as I advocate, would be two willing parties drawing up a contract. One would be providing the service of storing the other's money. The person whose money is being stored monies would be lent out. There would be a clause stipulating the length of time said money would be unable to be withdrawn until. They would both collect interest on the bank's loaning of said money. There would be a risk that the investment did not pan out. The interest rate stipulated would be what caused a person, who presumably has money to risk, in choosing which bank to deposit their money into (knowing ultimately the terms and conditions of said deposit). This would still be a full reserve bank, in kind, it's simply that people would have to wait a given period before requesting all of their money back. It would also be that there would be inherent risk in operating as such.

The bank would be limited in the investments they could take. They would be limited in risk. No one would loan their money to the bank to loan out if said bank had a habit of giving loans to whomever asks and if they received a reputation of acting haphazardly. The people, knowing there would be no federal insurance on their money, would be persuaded or at least would be wise to be persuaded, to manage their finances more closely. It would cause the people to investigate with whom they are entrusting their wealth to.

Banks can't "print the dollars they need". The Federal Reserve does that. Unless you got rid of the Federal Reserve and Treasury

That would be the plan.

..... and let banks make their own currency (like in the Free Banking Era which eventually collapsed.)

Now as scary as that's made to sound, (lol), they can choose whatever the people want to transact in. Cowrie shells, paper bills, feces.... it doesn't much concern me what people think is valuable. I will transact in gold and silver, copper, brass.... I like metals, personally.... services.... there are a lot of things I'd accept as payment. If I weren't forced to, printed pieces of paper would not be one of them.

If they want paper let them have it. It's odd that you would have to enact laws to force people to accept something if they already wanted it. Now we are to the point where the people think FRNs are money so who knows... they might like Benjamins.

And a bank can't "loan money they don't have". Loans are allowed to be made up to a certain percent of money (deposits) they do have- usually up to 90% of such funds. If they don't have enough deposits, they are not allowed to make the loans and that must be balanced daily.

This is your argument? That because they are limited slightly in their activities in the amount they loan with respect to the amount deposited that they do not loan out money they do not have? They are restricted in their loans ever slightly, yes. They are still collecting interest on fictitious monies.

Someone deposits $100, up to $900 is loaned out on that $100. What do you call that? I call it fraud.

That the people of which not one in a hundred know that that is what happens are complacent with such activities means little. Ponzi's victims had all the faith in the world in him. This isn't some philosophical debate. Chickens do come home to roost. And when it is all said and done, after the factories have long gone, and the fields are barren and prevalent, we will be worse off than if sustained economic growth was promoted and illusory, unsustainable growth shunned. If this system were ever to work, it would mean no one would ever have to work. Of course that is preposterous. As it stands, half work for the rest, and those controlling this money spigot work for no one but themselves.

It is true that they would lose any loan guarantees which would mean lenders would have to be more careful on who they lend to or risk going out of business. Depositors would also lose any insurance on deposits (unless a bank took out its own insurance policy on them) so they take on higher risk as well of losing their money if their bank goes bust. The FDIC only insures deposits (up to $250,000) not loans though. Fannie Mae does insure home loans.

Yes, the people would lose their money if they trusted a bank with it that operated as foolishly as some do now. It would be a great incentive for banks to act within their proper confines and for people to become aware of the practices of a given institution. It would also provide an incentive for people to consider their investments wisely.

With a full reserve bank, people wouldn't have to much worry about the practices of their bank absent blatant theft or embezzlement. There would be competition in banking. Absent the government picking winners and losers, the most competent and trustworthy would rise to the occasion.

Backing a currency with gold (or anything else) will have no impact on interest rates. The supply of money and demand for loans would determine that.

Indeed.

How would you propose banks should operate?

I would propose that they operate within the confines of the law. If I can't do it, why can they? I do recognize that this is hypothetical. I have great confidence in what free people can accomplish.

So long as I can transact in what I want, and am not obligated to bail out certain corrupt and foolish institutions I would be greatly satisfied. Even that is such a far cry from where we are that I doubt I'll see it in my lifetime and that should be so fundamental to a civil and enlightened society as to be unquestionable.

[kcchiefs6465]

That doesn't make a whole lot of sense. What about interest below the inflation rate? Is that usury?

Perhaps the inflationary aspects are so far spread and hard to corner that as we are dumping toxic debt onto other countries for it to come back home "to create jobs", the true cost of our money is never had?

I never really thought about it too deeply but my natural skepticism has me leaning towards you describing an impossibility absent the world wide disbursement of printed, illusory wealth.

Collecting interest on something you do not have or something that was created out of fingertips is indeed usurious. I don't care if they are collecting pennies on thousands (which they are collecting a bit more than that). The low interest rates, which to be clear, probably aren't lower than the rate prices are rising, is a means to entice a generation into crippling debt. Sure, it might not be loan shark rates of 40 percent or what have you but it is still a good percentage (what's the Stafford Loan, 5.5%?) and it is still acquiring something for nothing or at least, something at the expense of everyone.

Good question though and I am somewhat unsatisfied with my answer. Give me a bit to think about it and I might add something else.

[TheCount]

Someone deposits $100, up to $900 is loaned out on that $100. What do you call that? I call it fraud.

It's not fraud if there's no deception.

[Danke]

It's not fraud if there's no deception.

Yes, but if the Secret Service comes after me if I want to use money (i.e. not FRNs) outside of their system? Not fraud?

[helmuth_hubener]

a Full Reserve bank which you describe. A bank is not allowed to make any loans from deposits (100% must be kept in "reserve") so charging fees to store your money for you (or for other services) is the only way they can make money. No lending would occur (unless you can borrow from family members or friends). Business could not borrow to expand their production. Individuals could not borrow to make large purchases (like a house or car or school). Cash only. Slower economic growth.

False.

[kcchiefs6465]

It's not fraud if there's no deception.

The willful ignorance of the American public plays into their favor, yes.

There is quite a bit of [subtle, I guess could be said] deception within the fractional reserve system and Federal Reserve monolith.

I'm sure you've spoken to the average person and I don't doubt that they were unaware of what you were speaking about. It's their fault ultimately but to be clear, there was 17,000 hours, usually, of their time wasted with regards to learning about this system (or to be indoctrinated to trust every move made by the government). Even then they have no idea what the Federal Reserve even is, much less an idea about fractional reserve banking.

What would you call it?

[Vanguard101]

Fractional reserve banking is not fraud. I know exactly how it works and I am not being mislead.

This. Not only that, not every deposit is a demand deposit. It's bad policy, but it isn't fraud.

[kcchiefs6465]

This. Not only that, not every deposit is a demand deposit. It's bad policy, but it isn't fraud.

They offer people the illusion that their money is there.

And what happens when all of the people show up to collect their money?

What would you call it?

[Danke]

They offer people the illusion that their money is there.

And what happens when all of the people show up to collect their money?

What would you call it?

Fraud?

[TheCount]

Yes, but if the Secret Service comes after me if I want to use money (i.e. not FRNs) outside of their system? Not fraud?

If you name it a dollar and make it look like the dollar, then yes, the govt will come after you for muscling in on their turf.

[Vanguard101]

They offer people the illusion that their money is there.

And what happens when all of the people show up to collect their money?

What would you call it?

If they told you there is the slightest chance that they couldn't pay you back if every1 walked in and the people still decided to go along with it, is it fraudulent? Furthermore, this is still only in the context of demand deposits. What about other deposits?

[Zippyjuan]

False.

By definition a full reserve bank must keep 100% of deposits on hand. If they keep less than 100%, they are a fractional reserve bank. How do they make loans?

[Zippyjuan]

Quote Originally Posted by kcchiefs6465 View Post
Someone deposits $100, up to $900 is loaned out on that $100. What do you call that? I call it fraud.

It's not fraud if there's no deception.

If a bank has $100 in deposits and has a ten percent reserve requirement, they can issue $90 in loans- not $900.